Are consumers still jolly?

WASHINGTON (CBS.MW) - Everyone from George W. Bush to the Federal Reserve is talking about a downturn in the economy.

Everyone's worried about profits, sales, jobs, debt and the heating bill. The stock market has tumbled and now consumers are turning pessimistic. Is a recession around the corner? Has it already sneaked in the back door?

The Fed doesn't think so, or it would have lowered interest rates at its Dec. 19 meeting. As for the leaders of the new administration, it's certain that their gloomy words about the economy are half designed to pin the blame on the Democrats if the worse does happen and half designed as an argument for Bush's plans for a $1 trillion tax cut.

It doesn't really matter what the guys in Washington think about recession: They're just reacting. It's more important what consumers, investors, business leaders and workers think.

The economic data in the coming week will shed a bit of light, but not much. The calendar for the coming week is very light, with only two second-tier releases: December consumer confidence and November existing home sales.

"The fundamentals, while they're deteriorating, are still good," said Joel Naroff, president of Naroff Economic Advisers. Naroff is one voice in the economics profession who's been arguing that the economy is still strong and probably will remain healthy.

Naroff and others in his camp point to the 4 percent jobless rate as evidence of a sound economy. They say housing is robust and that businesses haven't let inventories build too high.

Still, Naroff admits that "consumer confidence matters."

And confidence has been slipping. The University of Michigan's survey of consumer sentiment plummeted in December to 98.4, the fourth largest drop in the survey's 22-year history.

In the coming week, the Conference Board will release its monthly consumer confidence index. That index began falling in October and hit a two-year low of 133.5 in November. It's expected to sink further, in to the 120s, in December.

"We're in the land of Keynesian animal spirits," said Leahey, recalling the great British economist's theory that entrepreneurial activity is highly dependent on psychological factors, especially optimism about the future

Naroff argued that "the consumer has been holding up."

"It's not as bad as the Nasdaq would have you believe," Naroff said.

Leahey thinks consumers finally saw enough and read enough to begin questioning how long the boom could continue. "We have all these headwinds: oil prices, equity markets, the tightening of bank credit and standards and the uncertainty of the election."

The final straw could be reports of layoffs, not just in dot-coms and high tech companies (where the job market had been ridiculously tight), but also in old-line companies like General Motors, Gillette and Aetna.

"There's no place to hide," Leahey said.

If consumers do begin to withdraw from the market, it could be a self-fulfilling prophecy: Lower spending will lead to layoffs, which will lead to further declines in spending.

Naroff wonders why Bush and Dick Cheney are bad-mouthing the economy. "The last thing you want to be doing is beating on people's confidence levels."

"You can't talk us into a recession, but you can have short-term problems," Naroff said. "It's not helpful."

Now for the other side of the story: The economy remains very healthy. Consumers are still buying homes at a fast clip.

Despite the Fed's six rate hikes, mortgage rates have returned to the 7.5 percent range, attracting plenty of buyers and, more importantly, lots of mortgage refinancing, which could give consumers some extra cash to pay down debt or buy more things.

Economists are expecting a little bump in existing home sales for November, up to 4.93 million from October's 4.69 million pace, based on strong mortgage applications.

"Single-family housing has been rock steady for six months," Naroff said.

Leave it to Leahey to throw out the last word: "November is ancient history. The market is going to discount any strength in housing," because the only December housing number we have was a very weak reading on the homebuilders' index.

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